Can It Be? Buffett Is Mortal?

Published: May 5, 1995

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Peter Russ, an analyst at Shelby Cullom Davis and a staunch admirer of Mr. Buffett, said that to some extent Mr. Buffett was a victim of his own success. Because he has so much money to invest, and because stocks are trading at such high price-earnings ratios, it has become more and more difficult for him "to find mispriced companies in wonderful situations," Mr. Russ said.

"The past seven years have been very difficult for the Warren Buffett style of investing," Mr. Russ said.

Some investors also think that the price of Berkshire Hathaway stock has gotten too far out of line from the value of the companies in which the company has invested. Pasadena Growth Fund sold its Berkshire Hathaway shares in late 1994, the managers Jim Mair and John Tilson explain, because "the premium got too high." Charles T. Munger, Mr. Buffett's partner and the vice chairman of Berkshire Hathaway, has recently sold stock in the company.

To be sure, Mr. Buffett's biggest investments are big and successful enough to let him make mistakes and swallow a few hundred million dollars of losses without much overall effect.

In addition to the 100 million shares of Coca-Cola that he acquired between 1988 and 1992, his other very successful investments include the Geico Corporation, the Gillette Company and the Washington Post Company. And he still has a substantial stake in Capital Cities/ABC.

"He's the world's greatest investor,' said Robert G. Hagstrom Jr., a Philadelphia money manager who profited handsomely from his 1994 best seller on Mr. Buffett's investment strategy. "USAir is a pimple on a $16 billion portfolio." Even so, Mr. Hagstrom acknowledged that USAir was a major mistake and that Salomon had been a disappointment.

Looked at as bond investments, Mr. Buffett's holdings of convertible preferred stock in USAir and Salomon don't seem so bad because of their high yields. But as equity investments, they seem less smart. Because of the serious financial problems at USAir, Mr. Buffett has written down his original $358 million investment to $89.5 million. "He paid a lot of money and his conversion price was high," says Steve Gidumal, an airline analyst at Bear, Stearns.

In Berkshire Hathaway's 1994 annual report, Mr. Buffett recognizes his mistake. "This was a case of sloppy analysis, a lapse that may have been caused by the fact that we were buying a senior security or by hubris," Mr. Buffett wrote. "Whatever the reason, the mistake was large."

Mr. Buffett has also had to write down his Salomon convertible preferred investment by $33 million to account for his share of the investment bank's 1994 net loss of almost $400 million. Salomon's troubled client businesses lost $179 million in the first three months of 1995, though first-quarter trading profits of $239 million pushed the company out of the red for the first time in a year.

Investments in pulp and paper companies, especially those like Champion International that own a lot of trees, have historically been a good hedge against inflation. But while Champion's senior securities, another convertible preferred investment, have provided a good return, the company lost money from 1991 through 1993, though its share price has risen recently.

And, despite a high and rising stock market, some of Mr. Buffett's other recent stock picks don't look so good. A stake of 8.3 percent, or almost 20 million shares, that Mr. Buffett acquired in 1994 in the PNC Bank Corporation still trades at below its acquisition price of $503 million, and was valued at $411 million at the beginning of the year. PNC is the holding company for the Pittsburgh National Bank.

But it is at Salomon, a unit of Salomon Inc,. where in 1987 he stepped in to buy $700 million of Salomon convertible preferred securities to rescue the firm from the investor Ronald Perelman, that Mr. Buffett faces some of his greatest challenges.

Altogether, Mr. Buffett has invested more than $1 billion in Salomon, and Berkshire Hathaway holds just over 20 percent of the firm's total voting rights.

In recent weeks, more than 20 managing directors have deserted the investment firm, many of them because they were unhappy with his plan to limit their annual compensation to $400,000 unless certain profit targets are met. The exodus forced Mr. Buffett's managers to modify the plan somewhat to keep top talent.

But great players, whether in Major League Baseball or on Wall Street, have a way of breaking their slumps. And for Mr. Buffett, the recent rally in Salomon stock, which has jumped from $32.25 in March to $37.375 yesterday, may be a signal that in the long term, the old Buffett magic is still there.

Photo: Some lackluster investments suggest that Warren E. Buffett ignored his own advice at times. (Bonnie Schiffman/Onyx) Chart: "UPS & DOWNS" A look at some of Mr. Buffett's and Berkshire Hathaway's investments since 1987. COCA-COLA Big winner. His current holding of 100,000,000 shares is worth $5.9 billion, more than four times what he paid. USAIR A loser. He paid $358 million for USAir convertible preferred stock shares in 1989. He says it is now worth $89.5 million. FEDERAL HOME LOAN MORTGAGE CORP. Another winner. 12.8 million shares acquired for $271 million, are now worth $842 million. SALOMON Still in trouble. Good earnings from the convertible preferred stock, but he has taken a writeoff of $33 million. He has also been drawn into management. GILLETTE A winner. Holds 24 million shares. Began acquiring stake in 1989 by investing in convertible preferred stock. Total cost was $600 million. Now worth $2 billion. WELLS FARGO Excellent. 6.7 million shares acquired in 1990 for $424 million now worth $1.16 billion. CAPITAL CITIES Mixed but good. Sold a third of his stake at $63 a share in late 1993. The price is now $84.75 a share, meaning he missed a potential profit of $217.5 million. But he still holds 20 million shares. Graph: "FROM SUPERSTAR TO JUST A STAR" shows the difference, in percentage points, between the performance of Berkshire Hathaway and the performance of the S.&P. 500 from '65-'90. (Source: Berkshire Hathaway)